Your business needs specific equipment to be competitive in the field.
Sometimes, however, the equipment cost can be out of reach. Other times, purchasing equipment might not be the best financial course of action for your business. Learn more about three popular ways that companies purchase new equipment to simplify the process for your own company.
Purchasing Equipment With Loans
Loans are still the primary way of purchasing new equipment for many businesses looking for long-term ownership. In many cases, business owners will head to the bank they have consistently worked with only to find that their financial institution is hesitant, if not unwilling, to finance their equipment purchases. Equipment purchases are risky due to obsolescence and depreciation of resale value should repayment fall through. There are, thankfully, other financing options for business owners that range in complexity and credit requirements.
Financing necessary equipment is not entirely impossible to secure. While banks may be hesitant, other funders are more than willing to fund equipment purchases. Public financing for loans starts with quotes for the equipment you want to purchase. You will submit the quotes along with your financials and a funding application. If approved, you will receive some or all of the financing to purchase your equipment; the money you receive generally can only be used for the quoted equipment. Other important information to know about equipment financing includes:
- Rates and terms fluctuate based on financials
- A down payment is typically required
- Usually self-secured, but sometimes collateral is required
- Quick turn around for approval and funding
Small Business Administration loans are backed by the United States government and granted by a lender. Despite the lender dispersing the loan and accepting the repayment, the SBA guarantees up to 85% of any default. These are more rigid in requirements and typically require excellent financials like traditional bank loans.
SBA loans are often the only way traditional bank loans get dispersed for equipment financing and, even then, usually only through big bank distributors.
The SBA offers a loan through Certified Development Companies for fixed-rate financing that ranges from $5,000,000. Certified Development Companies are SBA partners in local communities. The purpose of CDC-granted loans is to support businesses to create jobs and grow the local economy. Just like all SBA loans, CDC/504 loans are highly regulated. However, if approved, funding can be applied to the purchase of long-term equipment and machinery necessary to operate your business successfully.
To qualify for a CDC/504 loan, you must first confirm your eligibility. You can apply for this SBA loan if your business:
- Operates in the United States
- Is a for-profit company
- Has an average net income of less than $5,000,000 after taxes for two consecutive years
- Has a tangible net worth of less than $15,000,000
- Is within SBA size guidelines
- Has a feasible business plan
- Has credible ability to repay the loan
- Meets additional SBA 504 eligibility requirements
The 7(a) loan is backed by the SBA and dispersed by a lender. This loan also has the exact eligibility requirements as most all SBA loans do with a few specifics for 7(a) borrowers. Unlike the 504, however, the 7(a) is a little more rigid with what industries and equipment are eligible for borrowing terms. The eligibility checklist and the assistance of a trained financial officer will determine if your business is qualified for 7(a) assistance or if you should look elsewhere.
7(a) loans include more than just the standard 7(a) loan. Other subtypes in this lending category might be a better fit for your business but not for purchasing equipment in all cases. Other SBA 7(a) loans include:
- 7(a) small loan
- Export express
- Export working capital
- International trade
- Preferred lenders
- Veterans Advantage
Purchasing Equipment With Lines of Credit
While the funding for public financing and SBA loans is strictly tied to specific equipment purchases that must be approved, business lines of credit offer more flexible financing for borrowers. Business owners do not have to provide quotes for special equipment or operate within a specific industry but meet basic financial requirements and submit an application.
Once approved, you will be approved for an entire amount but have the flexibility to only draw what you need at any given time. Rather than making large payments on the whole amount you qualify for, you only repay what you borrow with interest. Lines of credit are an excellent alternative for businesses that cannot meet the structured requirements for other business or SBA loans. While financials must still be acceptable, lines of credit are less rigid in requirements.
Credit cards are a source of working capital wherein you only use what you need and repay that amount plus interest. Pay special attention to rates and terms when signing up for business credit cards for the purchasing of equipment.
Purchasing Equipment With Leasing
Equipment leasing is a practical option for business owners to get the gear they need without large lump sum payments or worrying about depreciation. However, business owners do not gain equity from their costs in their eventual purchase without buying because there is none. Further, installment payments may end up being more costly over time.
Determining which is best depends on what kind of business you have. Equipment leasing is likely the best option if it’s impossible to stay competitive without upgrades. Obsolescence or the complete uselessness of old equipment does not affect the lessee due to the nature of the lease terms.
Equipment leasing may be less practical if you plan to use the equipment you have for long-term use. Paying for the equipment outright may be a more cost-efficient approach that leaves you with equity to use as a down payment for later purchases.
Our finance experts are ready to make equipment financing a simple, fast, and flexible process for your business needs. Contact Platform Funding today and complete our application to get funded in three simple steps.